Mortgage insurance basics

What is mortgage insurance?

Typically, lenders and investors require mortgage insurance for loans with down payments that are less than 20% of the property value. The most common types of mortgage insurance options are provided by either:

• The Federal Housing Administration (FHA), which provides a program backed by taxpayers
• Private companies like MGIC, where mortgage insurance providers assume a portion of a lender’s or investor’s risk in financing a mortgage loan, ultimately shielding taxpayers from liability

For that risk, the insurer collects a premium from the lender, who then typically recovers the cost of the premium from the borrower. The “risk” in private mortgage insurance is that a borrower may default on a loan, and that may ultimately result in the insurer having to pay a claim.

Private mortgage insurance is available on a wider variety of loan products and typically may be cancelled sooner than FHA mortgage insurance. FHA mortgage insurance is not cancellable, unless the borrower makes a down payment greater than 10%.

Private mortgage insurance is not mortgage life insurance, which pays off a mortgage if the homeowner dies or becomes disabled. It is not homeowner's insurance, which protects homeowners from loss due to theft, fire or other disaster. Private mortgage insurance protects the lender and investor from loss, not the borrower.

How does private mortgage insurance work, in general?

Consider borrowers who purchase a $400,000 property with a fixed-rate mortgage. They make a 10% down payment and are required to use mortgage insurance to finance a $360,000 mortgage.

Typically, on a 90% LTV, fixed-rate mortgage, investors require 25% coverage, meaning, in the event of a claim, the mortgage insurer is responsible for paying 25% of the outstanding loan balance, leaving the lender at risk for 67.5%.

On an uninsured loan, the lender is at risk for the entire loan balance.

If, down the road, borrowers fail to repay their mortgage, the lender or investor files a claim based on the unpaid loan balance, delinquent interest and foreclosure costs.

The benefits of mortgage insurance for borrowers

Financing with mortgage insurance creates opportunities for your borrowers.

Increased buying power

Because mortgage insurance makes it possible to buy a home with less than 20% down:

• Homebuyers – especially first-time homebuyers – can reach savings goals faster and become homeowners sooner than otherwise possible
• Move-up buyers are able to consider a wider range of homes and leverage their investment in their current home

Expanded cash flow options

Borrowers can benefit by putting less money down and keeping cash for other uses: making investments, paying off debt, or paying for home improvements or emergencies, for example.

Lower monthly payments

MGIC monthly mortgage insurance premiums are usually lower than FHA’s and do not require the upfront payment that comes with an FHA loan. That translates to lower monthly mortgage insurance costs and often monthly mortgage payments that are less than borrowers would receive with FHA financing. Learn more about MGIC monthly mortgage insurance premiums.

Secure, competitive, predictable monthly payments

A fixed-rate mortgage with monthly mortgage insurance provides borrowers with a locked-in monthly payment that will not increase and that will be reduced when mortgage insurance is cancelled.

Private mortgage insurance is cancellable

On most loans with private mortgage insurance, lenders must automatically cancel coverage when the loan reaches 78% of original value through amortization. Borrowers may be able to cancel private mortgage insurance by making extra payments to bring the loan below 80% of their home's original value. Borrowers may also request cancellation based on a new appraised value. When your borrowers are ready to cancel, they should contact their loan servicer for a full description of cancellation requirements. Learn more about cancelling mortgage insurance.

Private mortgage insurance is tax deductible for qualified homeowners

Beginning in tax year 2026, borrower-paid mortgage insurance premiums are tax deductible for homeowners who itemize and meet the income threshold. Borrowers should consult a tax advisor regarding mortgage insurance tax deductibility.

How is mortgage insurance paid for?

Many factors influence the cost of MI, including the premium plan, loan characteristics, and the amount of MI coverage needed.

MGIC offers both borrower-paid and lender-paid MI premium plans. Borrower-paid monthly MI remains the mortgage industry’s preferred MI product because it’s easy to execute and offers several advantages for borrowers – but each mortgage loan is as unique as the borrower. Learn more about the advantages of other MGIC MI premium plans.

Get an MI quote

Ordering mortgage insurance

Generally, the lender orders MI while the loan is being underwritten. The loan originator consults with the borrowers to determine which loan product best meets their needs and then obtains an MI quote based on the borrower and loan information.

The investor typically determines the amount of MI coverage required for each specific loan product. Since Fannie Mae and Freddie Mac are the most prominent investors in the marketplace today, they set the standard minimum coverage requirements for the industry. Consult with your investors to determine the appropriate amount of coverage to order. See coverage requirements.

More about ordering MGIC mortgage insurance

Activating mortgage insurance

After approving an application for mortgage insurance, the insurer issues to the lender a document called a Commitment/Certificate, the purpose of which is twofold:

• Before the loan is closed, the document serves as a commitment from the mortgage insurer to insure the loan. Generally, the Commitment/Certificate is effective for 120 days from the date of approval. The lender has not yet activated insurance coverage, and it is not in effect at this time
• Once the loan is closed and the lender has paid any premium and notified MGIC to activate insurance coverage, the document serves as the insurance certificate and extends coverage to the loan

More about activating MGIC mortgage insurance coverage

Cancelling mortgage insurance

Mortgage lenders and investors typically will permit the cancellation of private mortgage insurance when the homeowner builds up enough equity in the home.

The Homeowners Protection Act of 1998 (HPA) covers single-family primary residences whose sales were closed on or after July 29, 1999. HPA provides for borrower-requested cancellation and lender-required cancellation based on the property’s original value.

Borrowers can work with their lender regarding cancelling mortgage insurance based on their property's current value.

More about cancelling MGIC mortgage insurance coverage